Where did all the rationalists go?

Are there any economic rationalists left in the Australian business community? Where are the fiscal conservatives when you need them?

[This article was first published in the Australian Financial Review - here]

Hard headed budget hawks are missing in action when it comes to our governments giving a $1 billion subsidy to help build the world's largest coal mine.

Just because something is a bad for the environment doesn't mean it is a good for the economy. Environmentalists wanting to stop the Adani Carmichael mine is not a reason for business to support it.

Reasons for coal intervention

Yet in Canberra, the silence from Australian business leaders on Adani is taken as tacit support for the subsidies needed to build its mine. Let's take a look at the reasons put forward to justify this wasteful public intervention in the coal market, all of which used outrage economic rationalists.

First up: jobs. While it is hard to imagine spending $1 billion and not stimulating some economic activity, it is even harder to imagine a project that would create fewer jobs per public dollar spent than the Adani mine. Indeed, Adani's hand-picked economic expert told a court that the project would create only 1464 direct and indirect jobs, and that estimate was based on the average capital/labour ratio of existing coal mines. Since that court case, Adani have been keen to talk up how "high tech" their mine would be – now promising shareholders automation "from pit to port".

But even if we take Adani's best-case scenario, and even if all of the 1464 new jobs were drawn from the ranks of the 161,200 people who were unemployed in Queensland in February 2017, then the unemployment rate would fall from 6.4 per cent to, wait for it, 6.4 per cent. The impact of the Adani project on the Queensland economy would be so small that it wouldn't shift the unemployment rate at the first decimal place.

Then there are "all the taxes' that the subsidised mine will provide. State government tax revenues from mining come in the form of royalties paid in exchange for the resources extracted. But after nearly seven years of talking about the benefits to the Queensland budget of the Adani mine no one has any idea what price Adani will pay Queenslanders for their coal. We do know that former Queensland Premier Campbell Newman had offered Adani a "royalty holiday" (free coal). But the current government has never clarified what price, if any, they intend to charge. As for the federal government revenue, the mining industry already pays the lowest proportion of their profits in company tax. Beyond that, the existence of Adani subsidiaries in Mauritius and the Cayman Islands have already been revealed before the first tonne of coal has even been mined.

Finally, and most bizarrely, at a time when world demand for coal is flat and the price of renewable energy and batteries is collapsing, some coal supporters say public subsidies are justified because, wait for it, the renewable energy industry gets subsidies. It is a strange form of economic rationalism or fiscal conservatism that argues that if you can't remove the subsidies from one product you should invent a new subsidy for its competitor.

Different principles

Of course as Margaret Thatcher, Angela Merkel and Arnold Schwarzenegger have shown, there is no need for economic conservatives to be climate sceptics. Indeed, historically economic "hard heads" would have been more likely to trust scientific advice than the average environmentalist. Let's not even get into the fact that the mining industry couldn't exist without science but it has bankrolled science scepticism when it comes to climate. Internationally, conservatives that do take the advice of economists and scientists prefer the introduction of a carbon price to level the energy playing field than the creation of new subsidies for the coal industry.

But in Australia, despite the stated concern of business leaders about the state of the budget, taxpayer subsidies for the construction of an enormous new coal mine is not subject to the principles of fiscal conservatism, economic efficiency or even market risk. On the contrary, the fact that environmentalists want to stop the mine is enough for some to assume it must be a good idea. Not a very rational way to make decisions.

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